Should Lakeview Hospitality Pvt Ltd. integrate further by sub-retailing a liquor outlet at Chembur (Mumbai) or diversify by opening a pub in order to further expand its business?
The following Extended Essay in Business & Management is on the private limited company Lakeview Hospitality Pvt Ltd. that currently is operating in the Alcohol Industry involved in the retailing of Alcoholic beverages. Although profits are being made, the company's sales are falling due to heavy government intervention, social advertising and competition from pubs and bars. To restore their former glory, Lakeview Hospitality is considering two expansionary options - setting up a pub (Diversification) or sub-retailing a liquor store (Market Development). Hence, my research question is: -
Should Lakeview Hospitality Pvt Ltd. integrate further by sub-retailing a liquor outlet at Chembur (Mumbai) or diversify by opening a pub in order to further expand its business?
I have analyzed and evaluated both expansionary options by researching into the two industries. The analysis includes both qualitative and quantitative data. The following tools were used to arrive at a decision: -
Lewin's Force Field Analysis.
Michael Porter's Five Forces.
After a complete analysis, there was a definite result.
Due to great Qualitative advantages and lower risk, growth through Diversification is a better option as compared to that of Market Development. This decision is very beneficial in the short run as the alcoholic industry and the Indian Economy stabilize.
In the long run, Lakeview Hospitality will definitely acquire more liquor retail outlets, as there are a number of areas that they have not expanded into at present.
I have also in my recommendations provided a Marketing Mix for the new pub.
Limitations, mainly due to forecasting, and some unresolved issues have also been highlighted.
Word Count: 282 words. Table of Contents: -
Decision Making Framework
Reasons for Expansion
Type of Expansion
Qualitative analysis of both Options:
Kurt Lewin's Force Field
PEST Analysis of both Industries
Michael Porter's Five Forces
Quantitative analysis of both options:
Conclusion and Recommendations:
Limitations and Unresolved Issues
Appendix 1 - SWOT analysis of company
Appendix 2 - Interview with Owner
Appendix 3 - Interview with Finance Manager
Appendix 4 - Employee details of Lakeview Hospitality Pvt Ltd
Appendix 5 - Areas where Lakeview Hospitality can sub-retail liquor stores.
Appendix 6 - Famous bars, cafés and clubs with attractive Unique Selling Points
Appendix 7 - Survey of people aged 15-25 years in Powai on sports preferences.
Company Background  : -
Lakeview Hospitality Private Ltd. is a private limited company operating in the retail business selling Alcoholic Beverages for 7 years. Pioneers in this industry's retail business, the owner of Lakeview Hospitality is solely responsible for its huge success over the years in and around Mumbai. The entrepreneur's main aim is to operate in the service sector. Today, Lakeview Hospitality comprises of 10 Retail Outlets, selling Alcoholic Beverages, situated within Maharashtra, India.
Table 1: - List of Lakeview Hospitality's Retail outlets from the year of conception: -
Year of Conception
Lakeview Hospitality owns most of the above shops but some are also sub-retailed. Over the years, Lakeview Hospitality has established itself in the market with a steady growth rate and has generated profits even during the global recessiondue to Mr. Sethi's image leading to repeat sales from existing customers showing customer loyalty.
AlcoholBeverages produces negative externalities as a result of which the Indian Government has posed a number of restrictions on the retail sector of this industry, like prohibition of above-the-line promotion and high tax rates. As a result of this, Mr. Sethi is unable to advertise his business and the ever-increasing tax rates have increasingly led to his business becoming static. Therefore, Mr. Sethi is considering expansion as an option to redevelop the dynamic characteristics it once boasted and minimize risk. Lakeview Hospitality may develop a market in Chembur for their existing liquor business or diversify by setting up a pub. Both forms of expansion are worth considering according to Mr. Sethi and the proposal's viability has led me to my Research Question: -
Should Lakeview Hospitality Pvt Ltd. expand further by sub-retailing a liquor outlet at Chembur (Mumbai) or diversify by opening a pub in order to further expand its business?
The issue was approached through the following steps: -
Discussion with Owners
Expansion justified through Lewin's Force Field
Form of Integration justified through Ansoff Matrix
Current Financial Health: Ratio Analysis
Qualitative Assessment of expansionary options: -
Porter's Five Forces PEST Analysis Lewin's Force Field
Quantitative Assessment of both options: -
Investment Appraisal Decision Tree
Conclusion and Recommendation
Limitations and Unresolved Issues
Reasons for expansion:
Lakeview Hospitality is looking to expand on a high scale in the next few years. This year, they have already purchased an outlet at Andheri to further their Liquor Retail business. As mentioned by Mr. Sethi, expansion is the only way forward for the business as there is no room for complacency in the corporate world.
Therefore, before expansion, it is necessary to identify some of the driving and restraining forces for the expansion. I have done this through the use of Kurt Lewin's Force Field Analysis. I have taken the three most important forces for each type of force and its weight ranges from 1 (weak) to 5 (strong).
Table 2: - Driving Forces for expansion  .
Increase Sales Revenue and Profit.
Economies of Scale.
Increasing competition from other industries  .
The total weight of the driving forces is 13/15.
Due to increasing real income, expansion in the tertiary sector would only be viable and profitable in the short and long run.
Lakeview Hospitality can reap the benefits of scale due to reduced costs and minimization of risks.
Lakeview Hospitality's Liquor retail business has been experiencing stiff competition from pubs and bars. To keep pace with the new competition and demographic patterns, Lakeview Hospitality must expand their business.
Table 3: - Restraining forces for expansion.
Poor Liquidity 
Threat of Double-Dip Recession  .
High Property Rates  .
The total restraining forces for expansion are 10/15.
Lakeview Hospitality's Current and Quick Ratio suggest that its Liquidity is not up to the standard 2:1 or the 1:1, respectively.
With the global economy expected to plunge into another recession, the investment may backfire if the target market's real income falls.
The property rates in and around Mumbai are now booming and as the real estate sector is yet to reach its peak, the high costs of expansion could be a major issue in the future.
Through Kurt Lewin's Force Field Analysis it is evident that expansion is a more viable option, as the Driving forces for expansion are stronger than the Restraining forces.
Type of Expansion: -
Lakeview Hospitality can expand in industries of low to low-medium value, as their financial health is far from excellent at present due to Liquidity issues. These issues have occurred mainly from the acquisition of the Andheri Liquor retail outlet. Through the Ansoff Matrix, I will analyze the possible choices of expansion available to Lakeview Hospitality.
Diversification - Due to investment constraints, the most viable option of diversification is that of setting up a pub as it is a major competitor of liquor retail outlets and due to favourable social factors, setting up a pub is very viable.
Market Development - The best option here is to sub-retail a liquor outlet at Chembur. Sub-retailing reduces costs as compared to acquisitions. Chembur is part of the Mumbai South Central Parliamentary Constituency, which is highly populous and can be exploited by Lakeview Hospitality.
Product Development - Developing a new product is out of the question due to the high R&D costs and adopting an existing product would lead to high costs in terms of official permit and purchase of the technology or design from the Patent / Copyright holder. Therefore, Lakeview Hospitality should not use the approach of Product Development.
Market Penetration - A change in the marketing mix of the company's liquor business would be as a result of their decision to penetrate their present market. Due to the product's homogeneity, it is highly recommended that a change in the marketing mix does not occur, as this industry is that of Perfect Competition.
If observed, two options of expansion stand out on grounds of viability and feasibility - Market Development (New Market & Old Product) and Diversification (New Market &New Product). Thus, I recommend that Lakeview Hospitality expand through either Market Development or Diversification.
Current Finances: -
Before expansion, Lakeview Hospitality must consider the financial implications of its investment. Most of the revenue generated is retained in spite of expansion at regular intervals. However, the finances of the company are a restraining force to expansion. This can be seen through the Profit & Loss Account for year ended 2009, the Balance Sheet as of January 1st, 2010 and the derived Financial Ratios.
Table 4: - Profit & Loss Account for year ended 2009.
Cost of Goods Sold
(Before Interest and Tax)
(After Interest and Tax)
Table 5: - Balance Sheet as of January 1st 2010.
Total Fixed Assets
Total Current Assets
Total Current Liabilities
I have calculated Financial Ratios in order to obtain a bird's eye-view about the company's Liquidity, Profitability, Gearing and Efficiency. These ratios have given me an idea as to the weakness in Lakeview Hospitality's finance.
Table 6: - Financial Ratios of Lakeview Hospitality.
Type of Ratio
The above ratios ascertain that Lakeview Hospitality's finance is not in a stable. Therefore, it is necessary that Lakeview Hospitality reduce costs, as the cost of the goods they sell is very high resulting in reduced Gross Profit and poor Profitability.
At 35.88 %, there is still scope for a better gearing. However, if a long-term loan is taken to finance the expansion, then the Gearing is bound to fall. Therefore, in this trade-off one has to make sure that creditors are quickly paid.
Lakeview Hospitality also has poor efficiency. Seen in the ratio Return on Capital Employed, it is evident that due to the high variable cost, the Net Profit has lowered leading to poor Efficiency.
As Lakeview Hospitality is not in the best position to finance for the expansion of the business, it is necessary that a long-term loan be taken from the bank so that it can expand in the near future to improve its sales revenue. However, the company must look at their costs and as the cost of the finished products cannot be influenced, Lakeview Hospitality could reduce the overall cost by reducing overheads.
Qualitative analysis of both proposals: -
I have identified and analyzed the driving and restraining forces for both proposals through Kurt Lewin's Force Field Analysis.
The effect of external influences on the Industries will greatly affect the success of the project as well. Therefore, I will analyze the industries' external environment using the PEST Analysisand Michael Porter's Five Forces.
I. Kurt Lewin's Force Field Analysis: -
Table 6: - Driving forces for Market Development.
Increase in Company Sales Revenue.
Costs of purchase or sub-retailing are lesser than that of diversification.
Economies of Scale.
Risk Factor is Low as the same industry is being targeted.
Employees of same work skills will be required so there will not be a huge human resource implication  .
The total weight of the driving forces is 20/25.
The most important reason driving Lakeview Hospitality to develop a new market in the same industry is that it will increase sales revenue and enhance the company's profitability.
Through Market Development, the company will ensure that costs are not as high as those experienced by Pub owners due to Purchasing Economies of Scale.
Through expansion, the company will be able to gain benefits of scale. Already possessing 10 shops, through sub-retailing the company will be able to cut costs.
By expanding in the same industry, Mr. Sethi will ensure that the risk factor of entering a new business will be low.
The company needs to hiremainly unskilled workers and recruitment should not be a problem,as the company is experienced in recruiting employees with a similar skill requirement.
Table 7: - Restraining Forces against Market Development.
Cost of sub-retailing an outlet will be high and cannot be easily forecasted.
Lakeview Hospitality's Liquidity isn't up to the standard.
Work Ethic and Organisational Culture at the new site may differ.
High Government Regulation expected to rise in the future will create further problems like high taxation and reduced demand. 
Education through newspapers, magazines, television and radio has led to social advertising increasing consumer awareness on alcohol addiction and its effects.
The total weight of the restraining forces is 21/25.
The company may still have to shell out a great amount of its retained profit as the owners of the outlet may charge exorbitant rates for the Rent and Brand Name.
The Current Ratio is 1.625:1 and Quick Ratio is 0.375:1 which are both not up to the standard. Therefore, investing through operating profits would not be possible, as this would adversely affect the working capital.
The work ethic and mindset in the labour market varies from place to place and the management setup may have to vary at the new place. Although the HR system is similar at every outlet, some variation may be required.
The opportunity cost of operating in this industry is high at every level as there is heavy scrutiny on part of the government.
In Maharashtra, Social Advertisements have become the government's main priority and the most heavily advertised industries are those of Smoking and Alcohol. Therefore, due to awareness amongst people, there may be future reduction in demand and organic growth at present could be a huge risk.
As it can be ascertained through the Lewin's Force field analysis, the option of expansion into the liquor retail sector may not be very viable as the restraining forces are greater than the driving forces.
I will now look at the forces driving and the forces restraining the setting up of a pub in Mumbai.
Table 8: - Driving Forces for Diversification.
High Growth Rate of the industry.
Demographics show Mumbai population is young and the industry mainly earns its revenue through consumers aged 18-35 years with the average age being 24.4 years  .
Lakeview Hospitality can promote its Liquor branch through the Bar.
As the Liquor business is saturating, entering into new businesses may help finance the liquor business in future.
By having eggs in different baskets, the risk is minimized.
The total weight of the Driving Forces for Diversification is 21/25.
The market for pubs has been growing at a steady rate of 8 %  . Thus, this is a great driving force for Lakeview Hospitality to set up a Pub in Mumbai, a hub for pubs.
The average age of Mumbai is ideal for the pub industry and pubs are of great popularity in the age group of 18-35 years. Moreover, there are many themes that could be adopted that could increase loyalty. For example, the Manchester United Café Bar is a Sports Bar cum Restaurant and due to its theme of Football it has gained popularity amongst the youth in Mumbai.
As advertising in the Liquor Industry is prohibited, the company could promote its Liquor branch through the pub that they would set up.
As the Liquor business is static, an external source like the pub may be used to provide finance for it.
Lakeview Hospitality can greatly minimize risk by diversifying. This is recommended as their Liquor business may be subject to government regulation in the future and demand for Alcoholic beverages (although inelastic now) may fall.
Table 8: - Restraining Forces against Diversification.
Lack of expertise in managing a bar.
High property rates all over Mumbai. These are likely to rise.
Start-up and daily running costs will be very high (HR, Informative and Persuasive Marketing, High raw material costs).
Liquidity Ratio below the standard.
High Competition in this Industry. Competitors are already well established (Leopold Café, Hard Rock Café, etc.) 
The total restraining forces for Diversification are 20/25.
LVH is short of in-house hands at present and due to lack of expertise in running a pub could be detrimental to the success of the project.
Property Rates in Mumbai are very high and it is recommended that LVH purchase sites now before the real estate industry reaches its peak as otherwise the rates could drastically increase.
The company will have to be prepared to face high costs during set up as it is very important for the pub recruit quality staff and also undertake informative and persuasive advertising. These costs are not incurred at retail outlets and it may be tedious for Mr. Sethi to identify all costs and tackle them in the least expensive manner as possible.
The Current Ratio is 1.625:1 and Acid Test Ratio is 0.375:1 which are both not up to the standard. Therefore, investing through operating profits would not be possible, as this would adversely affect the working capital of their retail outlets focusing on Alcoholic Beverages.
Two features of the pub industry are that there is high competition and that it is almost impossible to maintain customer loyalty. Therefore, if the project is not successful, there could be a huge problem for the company due to the stiff competition in the industry.
The Driving forces, in this case, overpower the restraining forces suggesting that Diversification is a viable option of expansion. Thus, if an choice is to be made between the options Market Development and Diversification, I would choose Diversification as setting up a pub seems to be more viable than sub-retailing a liquor retail outlet at Chembur.
II.PEST Analysis of both industries  : -
Political Factors influencing both Industries: -
Alcoholic beverages cannot be promoted using Above-the-Line Promotion as per Government Law  .
The government has now stopped issuing licenses for liquor retail outlets.3000 shops exist within Mumbai, Thane and Raigarh. The disadvantage of this rule to LVH is that now it's option of Organic Growth has been limited to Acquisitions and Sub-retailing.
Goods like Alcoholic Beverages that produce negative externalities have been taxed at higher rates every year in an attempt to stop consumption. Therefore, such external political factors have led to an increase in costs and prices and reduction in demand of these products is possible.
To set up a Liquor shop, the company has to obtain liquor licenses from the municipal authority. This task is tedious and by sub-retailing the shop, LVH will be able to avoid these licenses. However, a mandatory fee has to be paid to the municipal authority on monthly/yearly basis.
According to the State Government, people under the age of 21 years are not allowed to enter the pub or social bar. However, there is no such age limit when it comes to Sports Bars or Fine Dining Bars. This kind of legal structure shows that LVH could attract a higher customer base by creating a similar Unique Selling Point.
In this industry, a number of licenses have to be obtained from the Municipal Authority like the Liquor License, Food & Gas License and Hygiene & Safety License.
It is necessary for the company's to set up a Provident Fund for employees if the company employs more than 20 employees. This increases costs and as the concept of Hire & Fire is prominent in this industry, maintaining a Provident Fund would be a tedious task.
A time limit exists for pubs in Mumbai. They have to stop operating after 01:00 AM and as this deadline is usually overlooked, the Maharashtra State Government tends to fine those bars and pubs that do not conform to the laws.
Economic Factors influencing both Industries: -
The real income of India has been increasing over the past few years and this can be seen through the GDP per capita of India for the past 2 years. This may lead to a significant increase in demand for LVH's products.
Property rates have been increasing in Maharashtra and this sector has been said to boom in the next few months. Therefore, by sub-retailinga shop, LVH can avoid the cost associated with the purchase of property.
Market Growth in the industry has been considerable over the last few years and further growth is expected to occur in the liquor industry. Therefore, it would be ideal to invest in an industry where the growth rate of the market size is considerable.
The possibility of a Double-Dip Global Recession may adversely affect businesses. If Real Income significantly reduces, then it may adversely impact the industry.
The real income of India has been increasing over the past few years and this can be seen through the GDP per capita of India for the past 2 years.
Property rates have been increasing in Maharashtra and this sector has been said to boom in the next few months. Therefore, LVH should purchase property now in order to avoid higher property costs in the future.
Market Growth in the industry has been outstanding over the last few years and further growth is expected to occur in this industry.
The possibility of a Double-Dip Global Recession may adversely affect businesses of elastic nature like that of pubs and bars if the real income of the people reduces.
Social factors influencing both Industries: -
Crime rates have been heavily linked with the over-consumption of alcohol. This can occur when customers or the workforce of the business organization, under the influence of alcohol, ends up committing a crime. Therefore, the Government has tried to suppress demand for Alcohol by increasing Indirect Tax Rates.
A great number of negative externalities exist in this business and as a result of these problems, the company's operating in this industry tend to have a bad corporate image. Therefore, by penetrating further in an industry in which LVH has already been operating since 7 years there is a chance that LVH's image may take a toll.
The working hours that this industry demands from its workers results in demoralizing of workers and this can affect labour productivity. LVH has been trying to deal with this problem by providing its employees a number of incentives.
Increase in consumer awareness through Social Advertising has resulted in bad publicity for the industry. Although "There is no such thing as bad publicity except your own obituary", the recent criticism of this industry may lead to a significant decline in sales.
The Age group of 18-35 years has now become attracted to pubs and bars that have been set up in Mumbai. Mumbai has actually become a hub for these clubs due to the consumer profile as youngsters enjoy partying in places like pubs where they are able to eat, drinks and dance. Thus, LVH's business will have to bow down to his social factor in the near future.
The customer base targeted by this industry is 21 - 35 years. Also, the population in Mumbai has greatly increased and the average age is relatively young leading to an increase in demand for pubs.
Noise Pollution through pubs is of great concern as it creates great nuisance amongst the senior citizens and young children affecting their mental and physiological stability. Therefore, a number of pubs in residential areas have been forced to shut down.
Traditionally, pubs are not part of Indian culture. They are an adaptation from the Western style of living. Therefore, the elderly do not consider it traditionally ethical for the youth to visit these pubs.
The negative externalities associated with this industry are also pretty high. Control of liquor consumption cannot be assured and this results in accidents occurring from drunk driving, murders, etc.
Technological factors influencing both industries: -
Rapid Technological advances in this industry have led to a great variety in products. Apart from the fact that there are different types of Alcoholic Beverages (Wine, Vodka, etc), Technology has helped a great deal when it comes to brands and development of different flavours in drinks.
The high-quality packaging that takes place these days is also because of the technological advancements.
The technology purchased by pubs can play a crucial role in the pubs success. Technology enhances the Unique Selling Point. Also, the ambience created by technology can 'make-or-break' the profits and popularity of the pub.
III. Michael Porter's Five Force: -
Table 9: - Porter's 5 Forces of both expansion options.
There are a number of retail outlets in each district and due to this, buyer power is very high as a great deal of options are open to customers in case of unethical behaviour. Moreover, the homogeneity of the products in this market aggravates the external threat even more by increasing the already high Buyer Power.
Through diversification of their business by opening Bars, the company will face a slight problem of wavering demand. The elastic demand is prevalent in this industry as a result of social mindsets and low entry barriers. Therefore, it is very difficult to ensure customer loyalty for Bars and unless LVH can provide the customers with a USP, LVH's bar may be just like any ordinary bar that may not psychologically encourage its target market to return. Therefore, high Buyer Power also influences this industry.
The UB Group is the main supplier of alcoholic beverages in India to the retail outlets and although LVH has great business relations with the UB Group, it is important to consider that the UB Group's decisions of supplying to retailers mainly shapes the success of the retailers business as the UB Group is the market leader with approximately 85% - 90% Market Share. Thus, LVH would continue to operate in a market where its suppliers have immense power.
At a Bar, the owner has to purchase a number of materials for day-to-day functions. Therefore, there are a number of suppliers that the owner will have to deal with. Some of these materials have a high supplier power (UB Group for Alcoholic Beverages) and some have low supplier power (Food Products). Therefore, the supplier power in this industry greatly varies and Mr. Sethi who can, through his bargaining power reduce costs can use this as an advantage.
Threat from Competitors
It is fair to say that every district in Maharashtra has a number of retail outlets for liquor beverages. Therefore, whichever region LVH acquires or sub-retails a retail outlet, it will continue to face a great deal of competition from its own industry. However, another group of competitors LVH has to deal with is that of Bars, Pubs and Nightclubs. These have now become social hubs and consist of alcoholic and non-alcoholic beverages as well as Food and exist mainly to provide a group of people quality service and create for them maximum utility. These are also springing in areas with high purchasing power and this leaves only a few areas like NallaSopara untapped. Moreover, the fact that these target youngsters and middle-aged people (18-35 years of age) is a huge cause of concern for LVH as this eats away a huge chunk of the LVH's target market.
Bars have been set up in places where the youngsters living in the region have high real income to spend on these services. This works in favor of LVH as it can set up Bars in a number of high-income regions. However, it is unfortunate that every major hub for Bars and Nightclubs has already been bombarded with Bars and Nightclubs. Thus, the initial stages of LVH's bar will be dedicated to heavy promotion so as to gather a group of customers and once the bar has been able to show off its USP, word-of-mouth promotion will create the snowballing effect, which will lead to higher and higher people entering the Bars.
Threat from Substitutes
LVH outlets perform the function of a retailer in the channel of distribution in the market for Alcoholic beverages. The only direct substitutes to Alcoholic beverages are Soft Drinks like Coca-Cola, Energy Drinks like Red Bull, Health Juices like Tropicana and Mineral Water like Bisleri. However, it is absolutely evident that Alcoholic beverages have inelastic demand and it is very difficult for a person habituated to Alcohol to switch to soft drinks or any other non-alcoholic beverage. Therefore, in spite of the huge variety of threats provided by substitutes, LVH can be assured of ready demand for its products unless an external factor like a Political factor influences demand for LVH's alcoholic beverages.
The only substitutes that are present for Bars in the market are specialty restaurants, which have a USP that attracts customers. However, Bars and Restaurants belong to different markets and at present, the real income of most people cannot keep pace with the high value added at the specialty restaurants. Therefore, I feel there will always be a customer base for LVH's bar to rely upon.
Entry Barriers in Market
The only possible way a person can enter this market is by acquisition, sub-retailing or through mergers. The Indian Government as a result of the negative externalities produced by Alcohol consumption has put this restriction forward. Therefore, it isn't possible for new entrants to enter the market due to the extremely high entry barriers.
The entry barriers in this market are not very high and this is mainly due to the fact that this industry is not only booming but also that the Indian society is adopting the western culture of partying and clubbing. Therefore, this change in consumer tastes and preferences has led to the booming nature of the market making entry barriers low. This will make it easy for LVH to enter the market but there will always be a threat of new entrants eating into LVH's potential popularity.
Quantitative Analysis: -
Apart from the viability, it is necessary that I focus on the feasibility as well. Therefore, to find out the most feasible project, I conducted an Investment Appraisal of both projects and also constructed a Decision Tree.
Investment Appraisal: -
To estimate the Payback Period, Average Rate of Return and Net Present Value, I have conducted the Investment Appraisal. The forecast will not be clinical but it will help provide an idea about both projects' returns and value.
DIVERSIFICATION - PAYBACK PERIOD
Table 10: - Cash Flows for Diversification.
Cash Inflows (Rs.)
Cumulative Cash Flows (Rs.)
Payback Period = 4 year + 3.5 months.
Payback Period = 4 years 3 months and 2 weeks.
DIVERSIFICATION -AVERAGE RATE OF RETURN
Add all Inflows = Rs. 4,58,00,000.
Subtract Investment = Rs. 4,58,00,000 - Rs. 3,45,00,000 = Rs. 1,13,00,000.
Average = 1,13,00,000 / 5 = Rs. 22,60,000.
ARR = 22,60,000 / 3,45,00,000 * 100 = 6.55%.
DIVERSIFICATION - NET PRESENT VALUE
Table 11: - Discounted Cash Flows for Pub.
Depreciation Rate at 20%
Discounted Cash Flows (Rs.)
NPV = Rs. (1,03,81,950).
Market Development - Payback Period
Table 12: - Cash Flows for Liquor Retail Outlet (Sub-Retailed).
Cash Inflows (Rs.)
Cumulative Cash Flows (Rs.)
Payback Period = 2 yrs + 1.5 months.
Payback Period = 2 yrs, 1 month and 2 weeks.
Market Development -AVERAGE RATE OF RETURN
Add all Inflows = Rs. 1,58,00,000.
Subtract Investment = Rs. 1,58,00,000 - Rs. 56,50,000 = Rs. 1,01,50,000.
Average = 1,01,50,000 / 5 = Rs. 20,30,000.
ARR = 20,30,000 / 56,50,000 * 100 = 35.93%.
Market Development - NET PRESENT VALUE
Table 13: - Discounted Cash Flows for Liquor Retail Outlet.
Depreciation Rate at 10%
Discounted Cash Flows (Rs.)
NPV = Rs. 61,20,920.
Table 14: - Investment Appraisal Results.
Payback Period (Year/Month/Week)
Average Rate of Return (%)
Net Present Value (Rs.)
The above table highlights the results obtained after the investment appraisal. The comparison clearly shows that expanding through Market Development is a better option. The payback period and average rate of return of Market Development are better than those of Diversification as the return on the investment occurs much faster due to the low investment cost required in Market Development. Even when it comes to Net Present value Market Development is a better option as the depreciation rates of both projects differ and the low cost of investment helps increase the net present value. Therefore, through Investment Appraisal we can see that it would be a better option to expand through Market Development.
Decision Tree: -
I have prepared a decision tree for the purpose of incorporating risk into my Analysis of the expansionary options. The decision tree will conclude my financial analysis of both options.
The decision tree can be seen on the next page  .
Key for Decision Tree: -
=> Rejected Activity
=> Chance Node
=> Decision Node
=> Favoured Activity
Failure = 0.2
Success = 0.75
Opening a Pub.
Sub-Retail Liquor Store.
Rs. (56.50 Lakhs).
Success = 0.8
Failure = 0.25
Table 15: - Results of Decision Tree.
Net Value (Rs.)
Sub-Retail Liquor Store.
Open a Pub.
As it can be ascertained, the results obtained from the decision tree show that setting up a pub seems to be the more feasible option. Therefore, according to the decision tree, Diversification seems to be a better expansionary choice as compared to Market Development in spite of the fact that the investment appraisal claims that Market Development is the more feasible option.
Conclusion and Recommendations
As my decision-making framework suggests, I have used a variety of tools - qualitative and quantitative - to analyze the expansionary options. With the help of these tools as well as my primary and secondary data, I have received concrete results and I would like to highlight these results.
Using three tools for my Qualitative data, I figured that Diversification is more qualitatively supreme. This can be seen through theLewin's Force Field Analysis where the option of Market Development is clearly weighed down by the immense weight of the restraining forces compared to Diversification where the driving forces weigh more than the restraining forces. Also, through a PEST analysis of both industries, I inferred that the pub industry was a better option to expand into as the industry's growth rate was much higher, government regulation was lesser and its social costs were lesser compared to Market Development too. Moreover, through the Porter's 5 Forces, it is difficult to ascertain which industry is better but due to lesser threat from substitutes I think Diversification would be a more favourable expansionary move.
The superiority of Diversification, seen through Qualitative analysis, is absent when it comes Quantitative analysis. It can be seen that through the Investment Appraisal, the return on capital invested is not as good as that of Market Development and therefore, Diversification fails when it comes to feasibility. However, the Decision Tree shows that the chances of Diversification succeeding are high, as the probability of success in the pub industry has increased due to its high growth rate and is likely to increase in the next few years.
In spite of overwhelming evidence of the pub industries superiority, it should be noteworthy that Mr. Sethi has all the experience required to run a liquor retail business. Therefore, the risk of failure when it comes to the shop sub-retailing is further lowered. However, through experience Mr. Sethi has also noticed that there have been drastic social changes making the opening of a pub more viable.
Thus, after analysing both projects through Qualitative and Quantitative means, I have come to the conclusion that setting up a pub and Diversifying is both more viable and feasible than Market Development.
Therefore, if I am to answer my question - Should Lakeview Hospitality Pvt Ltd. integrate further by sub-retailing a liquor outlet at Chembur (Mumbai) or diversify by opening a pub in order to further expand its business? - I would answer by saying that Lakeview Hospitality Pvt. Ltd should integrate further by diversifying and opening a pub to further expand their business.
The above recommendation is the primary recommendation that answers my Research question and slightly eases Lakeview Hospitality Pvt Ltd's problem of choice of expansion. Now however I will be providing a secondary recommendation as well where I would like to highlight the key elements of the Marketing Mix for the new pub (assuming that the option of the pub is chosen).
According to my research, a strong Unique Selling Point is what makes a pub or bar successful. Therefore, I recommend that the new pub have the following marketing mix.
Marketing Mix of the new Pub: -
Product: - The theme of the pub along with varied cuisines (Examples - Indian, Italian, Mexican) and varied beverages (Examples - Hard, Soft, Energy) should be that of Sports, i.e., the pub should be a sports bar. Taking the example of Manchester United Café Bar - sports bar catering to the needs of Manchester United Football Club fans - this sports bar could be a huge success if the location is chosen with caution. With the increasing popularity of Football amongst youth of Powai  and due to the shortness and high intensity of the games, I strongly suggest that the sports bar run on the sub-theme of Football. Live League games during the weekends and Mid-week would definitely earn great revenue for Lakeview Hospitality.
(Above) Manchester United Café Bar - USP = Football. Sub-USP = Manchester United Football Club.
Another great unique service to be provided could be that of 24/7 availability. This would skyrocket popularity as it would enable fans to watch the premium UEFA Champions League games, the Spanish La Liga games and the Italian Serie A games that take place from 23:30 hours to 04:00 hours Indian Standard Time.
Due to the strong USP I feel this sports bar could compete with old and established bars and pubs like the Leopold Café.
Place: -Lakeview Hospitality, according to me should choose not only a location where a Sports Bar doesn't exist but also a location away from competitors like Manchester United Café Bar. Keeping this in mind, I suggest Powai as it classifies under the above features. Moreover, Powai is a residential, commercial and retail hub with schools and colleges in the area. As the target market would possess the real income required for the sports bar, it would be a great opportunity for Lakeview Hospitality to open up a sports bar in Powai.
Price: - Due to the high purchasing power of Powai and the huge demand for football, a Market Skimming strategy should be applied where an entry fee could be issued during live games. Also, by ensuring quality food and drinks, the sports bars secondary focus products could also stimulate satisfaction for non-football watchers accompanying football watchers. Every stakeholder is important and customers form a huge crux. Therefore, by psychologically pricing their products and services, Lakeview Hospitality can attract their target market and also stimulate customer loyalty guaranteeing repeat sales or visits.
Promotion: - Lakeview Hospitality would have to advertise cleverly for the first few months to inform and persuade its target market. I would suggest posters in and around schools, colleges and strategic locations in Powai and surrounding areas like Andheri and Mulund. Also, Lakeview Hospitality should create an official page on a Social Networking Website so that it can use the snowball effect caused by Networking. Another very effective method of Promotion would be sports magazines and Newspapers. This coupled with Word-of-Mouth promotion would be the perfect promotional mix for Lakeview Hospitality's sports bar.
The above marketing mix and choice of USP for the bar are mere recommendations and Lakeview Hospitality is not bound to use this recommendation. However, it is advisable for them to use this Marketing Mix for their product and this is my secondary recommendation to the business organisation.
LIMITATIONS AND UNRESOLVED ISSUES
Throughout the essay, there are a number of limitations and unresolved issues. These limitations and issues are: -
The owner of the company may have window-dressed the data - financial and non-financial - for personal purposes.
Tools cannot take into account factors that may occur in the future. For example, a change in the social factors influencing an industry may occur but that is not accounted into.
Factors like property rates fluctuate to a great extent and that could lead to a change in the decision of expansion.
The source of finance for expansion is unresolved and could be influential in the projects go-ahead.
The reaction of competitors and society cannot be estimated. Also, there is a possibility that like Lakeview Hospitality more companies may want to integrate through the set up of pubs.
The Unique Selling Proposition of the pub is yet to be decided and its success cannot be estimated.
Expansionary options like PURCHASING a pub and PURCHASING a Liquor outlet were not considered.